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8/3/2019 SNK Newsletter- October 2011
1/151
DIRECT TAXESJudicial pronouncements
SNK
Issue 10 October, 2011
NewsletterWebsite : www.snkca.com Email: [email protected]
DIRECT TAXES ... 1 - 12
OTHER LAWS ... 14 - 15
IMPORTANT DUE DATES 15
INDIRECT TAXES . 12 - 14
CIT Vs. M/s. National Travel Services [ITA No. 223 of
2010, 219 of 2010, 1204 of 2010 & 309 of 2011, Delhi HighCourt, dtd. 11.07.2011]
For s. 2(22)(e), firm is shareholder though shares held
in names of partners
The assessee was a partnership firm consisting of three part-
ners being Naresh Goyal, Surinder Goyal and Jet Enterprises
Pvt. Ltd. The assessee was the beneficial owner of 48.18%
of the share capital of Jetair Pvt. Ltd which were held in the
name of its partners Naresh Goyal and Surinder Goyal. The
assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd.The AO held that the said loan was assessable as deemed
dividend u/s 2(22)(e) in the hands of the assessee which
was reversed by the Tribunal. Before the High Court, the as-
sessee argued, relying on Ankitech Pvt. Ltd, Universal Medi-
care 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1
(Mum) (SB), that sec. 2(22) could only apply in the hands of
the shareholder and as the assessee was not a
shareholder (its partners were), s. 2(22)(e) could not apply.
Delhi High Court rejecting the assessees plea held that the
first limb of sec. 2(22)(e) is attracted if the payment is madeby a company by way of advance or loan to a shareholder,
being a person who is the beneficial owner of shares. While
it is correct that the person to whom the payment is made
should not only be a registered shareholder but a beneficial
share holder, the argument that a firm cannot be treated as a
shareholder only because the shares are held in the names
of its partners is not acceptable. If this contention is accepted,
in no case a partnership firm can come within the mischief of
sec. 2 (22)(e) because the shares would always be held in
the names of the partners and never in the name of the firm.
This would frustrate the object of sec. 2(22)(e) and lead to
absurd results. Accordingly, for s. 2(22)(e), a firm has to be
treated as the shareholder even though it is not the
registered shareholder.
Commissioner of Income Tax, Cochin v. Electronic Con-
trols & Discharge Systems (P) Ltd [(2011} 13 Taxmann
193, Kerala High Court]
Benefit of deduction under Section 10A is not available in re-
spect of sales made to a unit in Special Economic Zone even
though such sales are considered as deemed exports under
the provisions of the Special Economic Zones Act, 2005.
The provisions in Section 10A are comprehensive and ex-
haustive and that the mandatory conditions of Section 10A (3)
have to be satisfied to get the benefit of deduction on export
profits. Thus the benefit is available only on actual exports
and if the consideration is received in convertible foreign ex-
change. The concept of deemed export under the SEZ Act is
not incorporated in the scheme of deduction under Section
10A, the ITA is a self- contained code and the validity or cor-
rectness of the allowance has to be considered with refer-
ence to the relevant statutory provisions as contained therein.
Where Section 10A provides for deduction on profits derived
from export proceeds received in convertible foreign ex-
change, it could be stated that the Legislature never intended
the benefit to be extended to local sales made by the units in
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the SEZ, whether as part of Domestic
Tariff Area sales or inter-unit sales
within the Zone or units in other Zones.
Hence the Taxpayer was not entitled to
claim the deduction under Section 10A
in respect of profits derived from the
sales made to a unit in a SEZ.
Roma Builders (P) Ltd. Vs. Joint
Commissioner of Income tax [(2011)
60 DTR (Mum.) (Trib.) 231, ITAT
Mumbai Bench, dtd. 09.03.2011]
Principal object of the assessee com-
pany being to develop and sell the
premises constructed and there is ma-terial on record to show that the said
principal object of the company in-
cludes leasing of the stock i.e. property
for a temporary period to persons/
companies interested in temporary use,
rent is not received from exploitation of
the property by way of complex com-
mercial activities but the rental income
is derived by the assessee as an owner
of the property and it is liable to be as-sessed under the head Income from
house property.
CIT Vs Alembic Glass Industries
Limited [ITA No. 729 of 2011, Gujarat
High Court, dtd. 02.05.2011]
In case of business liability, deduc-
tion is to be allowed even if it is to
be quantified and discharged at a
future date.
If a business liability has definitely
arisen in the accounting year, the de-
duction should be allowed although the
liability may have to be quantified and
discharged at a future date. What
should be certain is the incurring of the
liability. It should be capable of being
estimated with reasonable certainty
though the actual quantification maynot be possible. If these requirements
are satisfied the liability is not a contin-
gent one. The liability is in present
though it will be discharged at a future
date. It does not make any difference if
the future date on which the liability
shall have to be discharged is not cer-
tain.
CIT Vs. Rasol Ltd. [(2011) 59 DTR
(Cal.) 369, Calcutta High Court, dtd.
19.05.2011]
Subsidy received by assessee from the
State Government under a scheme of
industrial promotion which was meant
to provide financial assistance to speci-
fied industries for expansion of capaci-
ties, modernization and improving their
marketing capabilities is capital receipts
though the amount of subsidy isequivalent to 90% of the sales tax paid
by the beneficiary.
Deputy Commissioner of Income tax
Vs. Divis Laboratories Ltd. [(2011)
60 DTR (Hyd.)(Trib.)210, ITAT Hy-
derabad Bench, 25.03.2011]
Commission paid to non resident agent
for services rendered outside India not
being chargeable to tax in India could
not be disallowed under Sec. 40(a)(ia).
Bharati Shipyard Ltd vs. DCIT [ITA
No. 2404/Mum/2009, ITAT Mumbai
Special Bench, dtd. 09.09.2011]
Amendment in Section 40(a)(ia) of
Income Tax Act made by Finance
Act 2010 is not retrospective
The Finance Act, 2010 has extendedthe time limit for depositing tax de-
ducted at source by the due date u/s
139(1) of the Act from the earlier lesser
time available for compliance. If the tax
is deposited by the due date, it would
mean escape from the clutches of sec-
tion 40(a)(ia) for assessment year
2010-2011, but if it is deposited even
the next day beyond the due date,
natural consequences would follow and
it would call for disallowance u/s 40(a)
(ia) in the year of incurring the expendi-
ture. In the like manner, in the year un-
der appeal, if the tax deducted at
source up to February, 2005 had been
deposited up to 31st March, it would
have amounted to compliance of the
provision, but the late deposit even on
1st April, 2005 would amount to non-
compliance warranting interference by
section 40(a)(ia) entailing disallowance
of expenditure in the Assessment year
2005-06. However the fact that the as-
sessee deposited it beyond the pre-
scribed period, would amount to com-
pliance of the prescription of the pro-
viso, entitling the assessee to deduc-
tion in the A.Y. 2006-07. Amendment
carried out by the Finance Act, 2010
with retrospective effect from assess-
ment year 2010- 2011 cannot be held
to be retrospective from assessment
year 2005-2006.
CIT Vs. Ranbaxy Laboratories Ltd.
[(2011) 60 DTR (Del.) 77, Delhi High
Court, dtd. 17.03.2011]
Provision of pension payable to em-
ployees is not covered by Sec. 43B(b) and same is allowable as deduc-
tion.
Clause (b) of Sec. 43B mentions about
provident fund, superannuation fund,
gratuity fund and is followed by any
other fund for the welfare of the em-
ployees. This last clause thus has to
take it colour from the previous clauses
and has to be read ejusdem generic.
The intention of the legislature behind
enacting Sec. 43B(b) was to disallow
the statutory liabilities. The legislature
never intended to disallow a claim for
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ascertained liability which is computed
scientifically in respect of the retiral
benefits of its employees and which is
not to be contributed to a fund. The
pension scheme provide that pension
would be paid by the assessee to its
employees on attaining the retirement
age or resigning after having rendered
services for specified years. Thus,
where the liability on this account ac-
crues form year to year, the same is
payable on retirement /resignation of
the eligible employees.
Shri Homi K. Bhabha Vs. ITO [ITA
No.3287/Mum/2009, ITAT Mumbai
Bench, dtd 28.09.2011]
PMS Fees not deductible against
capital gains. Despite dissenting
orders, reference to Special Bench
not necessary
The assessee placed Rs. 2.25 crores
with ENAM Asset Management Co, a
portfolio manager, which was used forpurchase and sale of securities etc and
gave rise to capital gains. The as-
sessee paid the portfolio manager fees
being 1/2% of the NAV of securities
under management in addition to 20%
of the profits in excess of 15% of the
profits after expenses. The assessee
claimed that the said fee had direct
relation with the capital gains and so
was deductible either as (i) diversion ofincome by overriding title from the sale
proceeds or as (ii) part of the cost of
acquisition of the shares or as (iii) ex-
penditure incurred wholly and exclu-
sively in connection with the transfer of
shares. The AO & CIT (A) rejected the
claim. Before the Tribunal, the as-
sessee argued that though the deci-
sion of the Mumbai Bench in Devendra
Motilal Kothari 50 DTR 369 (Mum) wasagainst the assessee, the decision of
the Pune Bench in KRA Holding &
Trading which had taken a contrary
view had to be followed. The ITAT
Mumbai Bench dismissing the appeal
held that:-
1. While, in Devendra Motilal Kothari
50 DTR 369, the Mumbai Bench
held that the fees paid for portfolio
management services was neither
diversion of income by overriding
title nor cost of acquisition nor cost
of improvement, the Pune Bench
in KRA Holding & Trading de-
clined to follow that by relying on
the judgement of the Bombay High
Court in Shakuntala Kantilal 190
ITR 56 (Bom). Subsequently, the
Mumbai Bench in Pradeep Kumar
Harlalka declined to follow the
Pune Bench on the ground that the
judgement of the Bombay High
Court in Shakuntala Kantilal had
been held to not be good law in
Roshanbabu Mohammed 275 ITR
231 (Bom). The majority opinion
(in terms of number of orders) and
the latest order (in the point of
time) were against the assessee.
2. The argument that the Mumbai
Benches had not appreciated the
correct position in law is not ac-
ceptable. Judicial discipline re-
quires that when a particular issue
has been decided by a bench,
then the subsequent co-ordinate
benches should normally follow
the same though there are no fet-ters on its powers to doubt the cor-
rectness of the earlier order if
there are compelling reasons for
the same. Further, whether an ear-
lier order should be followed or a
reference to the Special Bench be
made depends on whether the
Bench is satisfied or not about the
correctness of the earlier order
and not on the view point of the
aggrieved party. It is only when a
subsequent Bench finds itself un-
able to endorse the earlier view
that it may make reference for the
constitution of the Special Bench.
The aggrieved party cannot com-
pel the later Bench to either take a
contrary view or make a reference
for the constitution of the SpecialBench.
Bennett Coleman & Co. Ltd vs. ACIT
[ITA No. 3013/Mum./2007, ITAT
Mumbai Special Bench, 30.09.2011]
Loss on pro-rata reduction of share
capital is Notional. In absence of
consideration, capital gains provi-
sions do not apply
The assessee invested Rs.24.84
crores in equity shares of Times Guar-
antee Ltd. Pursuant to a scheme of
reduction u/s 100 of the Companies
Act, the face value of Times Guarantee
shares was first reduced to Rs. 5 from
Rs. 10 and thereafter two equity
shares of Rs.5 each were consolidated
into one equity share of Rs.10. The
result was that the assessees invest-
ment was reduced to Rs.12.42 crores.
The assessee, relying on Kartikeya
Sarabhai 228 ITR 163 (SC) & G. Nar-
simhan 236 ITR 327 (SC), claimed that
the reduction in face value was a
transfer and that it had suffered a
long-term capital loss of Rs.22.21
crores after indexation. The AO disal-
lowed the claim on the ground that (i)
there was no transfer and (ii) there
was no consideration and the ma-
chinery provisions of s. 48 cannot ap-
ply. The issue was referred to the Spe-
cial Bench. ITAT Special bench held
by the majority that -
1. First the face value of each share
was reduced from Rs. 10 to Rs. 5
and then two shares of Rs. 5 each
were consolidated into one share
of Rs. 10 each. If the argument isthat earlier shares were replaced
or substituted by new shares, then
there is no transfer but it is
merely a case of substitution of
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one kind of share with another kind
of share (Rasiklal Maneklal (HUF)
177 ITR 198 (SC) followed);
2. Assuming that a reduction of
shares in the manner done by the
assessee amounts to a transfer,
Sec. 45 is not attracted because
there is no consideration receivedby the assessee for the transfer.
Unless and until a particular trans-
action leads to computation of
capital gains or loss as contem-
plated by s. 45 & 48, it cannot at-
tract capital gain tax. On facts, the
assessee had not received any
consideration for reduction of share
capital. While the number of shares
held by the assessee has reducedto 50%, nothing had moved from
the side of the company to the as-
sessee (B. C. Srinivasa Setty 128
ITR 294 (SC) & Bombay Burmah
147 TR 570 followed)
3. Further, by the reduction, the as-
sessees rights had not been extin-
guished because it continued to
hold the same percentage in the
holding of Times Guarentee as it
did before the reduction. There was
no change in the intrinsic value of
his shares and even his rights vis--
vis other shareholders as well as
vis--vis company remained the
same. The concept of capital gains
has to be understood as in the com-
mercial world and there was no loss
that can be said to have actually
accrued to the shareholder as a
result of reduction in the share capi-
tal. Also, there would be no change
even in the cost of acquisition of
shares by virtue of s. 55(v).
Deputy Commissioner of Income Tax
Vs. Ansal Properties & Infrastructure
Ltd. [(2011) 60 DTR (Del)(Trib.)294,
ITAT Delhi Bench, 09.07.2010]
Where the assessee has transferred
entire plant and machinery of one divi-
sion and purchased assets with same
rate of depreciation in other division of
more value, the capital gains on trans-
fer of entire machinery and plant of the
said division amount to nil and not liable
to taxed under Sec. 50.
Mrs. Asha Bharat Shah Vs. ITO [ITA
No. 1716/Mum./2010, ITAT Mumbai
Bench, 15.02.2011]
The word may used in the sub-sec.
(2) to sec. 50C do not give discretion
to the A.O. to refer or not to refer the
matter to the DVO
Sub-section (2) of Sec. 50C provides
that if the assessee claims before the
A.O. that the value adopted by the
Stamp Valuation authority exceeds the
fair market value of the property as on
the date of the transfer which has not
been disputed by the assessee in any
legal proceedings then the A.O. may
refer the case to the Valuation Officer,
as per the provisions of the Wealth-tax
Act, 1957. The Ld. CIT (A) declined to
entertain the plea of the assessee for
referring the matter to the DVO by hold-
ing that the word may is used by the
Legislature and it is discretion of the
A.O. to refer or not to refer. Relying on
the decision of Meghraj Baid ITAT
Mumbai bench held that the word may
used in sub-sec. (2) to sec. 50C signi-
fies that in case the A.O. is not satisfied
with the explanation of the assessee
then he should refer the matter to the
DVO for the valuation.
Further ITAT Mumbai Bench relying on
the judgment of Smt. Sarala N. Sakra-
ney, held that reference by the AO to
the DVO under s.55A for valuation of
fair market value of the property as on
1st April, 1981 is not valid for the rea-
son that fair market value declared by
the assessee as per Government regis-
tered valuers report was more than the
fair market value as estimated by the
DVO.
CIT Vs. Dinesh Megji Toprani (HUF)
[ITA No. 3404 of 2010, Bombay High
Court, dtd 04.08.2011]
Exemption u/s 54F to HUF allowable
even if property is in the name of
individuals but purchased from HUF
account and with HUFs PAN
The assessee HUF sold certain immov-
able properties and out of the sale pro-
ceeds received, purchased immovable
properties and claimed benefit of de-
duction under Section 54F of the In-
come Tax Act, 1961. The assessing
officer was of the opinion that the prop-
erty was purchased in the name of the
individuals namely Dr.Dinesh Megji To-
prani and Mrs.Jyoti Dinesh Toprani and
not in the name of the HUF and, there-
fore, the assessee was not entitled to
the deduction under Section 54F of the
Income Tax Act, 1961.On appeal filed
by the assessee, the Commissioner of
Income Tax (Appeals) allowed the claim
of the assessee and by the impugnedorder, the Income Tax Appellate Tribu-
nal has affirmed the decision of the
Commissioner of Income Tax
(Appeals). Being aggrieved by the
above order, the Revenue has filed in
High Court. The Bombay High Court
dismissing the appeal held that no fault
can be found with the decision of the
Income Tax Appellate Tribunal in allow-
ing the benefit of deduction under Sec-tion 54F of the Income Tax Act, 1961
on the ground that the property pur-
chased in the name of the members of
the HUF, in fact belongs to the HUF.
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CIT Vs. Chiranjeevi Wind Energy
Ltd. [(2011) 243 CTR (Mad.) 195, Ma-
dras High Court, dtd. 10.01.2011]
Different parts of windmill when as-
sembled get transformed into an
ultimate product which is commer-
cially known as Windmill which
amounts to manufacture or produc-
tion within the meaning of Sec. 80-
IB(2)(iii)
The different parts procured by the
assessee by themselves cannot be
treated as windmill. Those different
parts bear distinctive names and whenassembled together, thereafter it gets
transformed into an ultimate product
which is commercially known as a
Windmill. There can, therefore, be
no difficulty in holding that such an
activity carried on by the assessee
would amount to manufacture as well
as production of a thing or article as
set out in Sec. 80-IB(2)(iii). (India Cine
Agencies Vs. CIT(2008) 220 CTR (SC)223 applied).
CIT Vs. Sumi Motherson Innovative
Engineering Ltd. [(2011) 60 DTR
(Del.) 190, Delhi High Court, dtd.
08.10.2010]
While computing book profit under
Sec. 115JB, under cl. (iii) of the Expla-
nation, brought forward loss on the last
date of immediate preceding yearwhich is to be brought forward to the
financial year in question is to be re-
duced; what happens during the
course of the year is not relevant. Tri-
bunal was therefore justified in uphold-
ing the claim of deduction of brought
forward loss as per books as on the
end of the immediate preceding year
even if during the current year such
loss was wiped off due to reduction ofshare capital.
M/s. Synthetic Colour Chem Indus-
tries Vs DCIT [ITA No.5563/M/2009,
ITAT Mumbai Bench, 11.05.2011]
Retraction of statement made dur-
ing the survey after six months is
merely an afterthought
The survey was conducted on
18.2.2005 when the loose papers be-
ing the pages 26, 27, 28, 29, 30 were
found which had been duly signed by
the partner of the assessee firm based
on entries and based on the said pa-
pers the partner of the assessee had
declared undisclosed income ofRs.1.05 crores. Subsequently on
4.3.2005, a fortnight after the date of
survey, the assessee had written a
letter to the AO in which a request had
been made that installments may be
granted for payment of additional tax.
However, 6 months later when the re-
turn was filed, a retraction statement
was enclosed alleging that the partner
had been forced to admit additionalincome and in fact no incriminating
papers were found. These claims have
been rejected by the authorities below
as an after thought. ITAT Mumbai
bench held that no infirmity was in the
conclusion arrived at by the revenue
authorities on this point. In case, the
partner had really been forced to admit
additional income and papers were
cooked up, by the survey party, the
assessee would have immediately af-
ter survey complained to the higher
authorities. The Learned AR for the
assessee admitted that no complaint
had been filed by the assessee. In fact
two weeks after the date of survey the
assessee had written a letter dated
4.3.2005 to the AO requesting for in-
stallment and even in this letter no alle-
gation was made. The loose papers
found have been duly signed by the
partners and these clearly gave the
details of unaccounted sales and un-
accounted commission. Under these
circumstances the affidavits filed re-
tracting the statement and making alle-
gations six months later has to be
treated as a self serving statement bythe partner and his employees and this
has to be rejected as an afterthought.
DCIT Vs. M/s. Stup Consultants Pvt.
Ltd. [ITA No. 5617/Mum/2009; ITA
No. 6062/Mum/2009 & ITA No. 6063/
Mum/2009, ITAT Mumbai bench, dtd.
09.09.2011]
Despite s. 209(3) of the Cos Act,
company can follow cash systemfor tax purposes
The assessee, a company, followed, in
accordance with s. 209(3) of the Com-
panies Act, 1956, the mercantile sys-
tem of accounting according to which
the profits were Rs. 7.48 crores. How-
ever, for income-tax purposes, it fol-
lowed the cash system of accounting
according to which the profits were Rs.
4.76 crores and offered that sum to
tax. The AO rejected the claim on the
ground that u/s 209(3) of the Cos Act,
a company is obliged to follow the mer-
cantile system and that is its regular
method for purposes of s. 145. How-
ever, the CIT (A) upheld the as-
sessees claim. On appeal by the de-
partment, ITAT Mumbai Bench uphold-
ing the assessees plea held that the
assessee has regularly employed the
cash system of accounting in recording
its day-to-day business transactions. It
is not a case where the assessee has
been maintaining its accounts of day-
to-day business under the mercantile
system of accounting and thereafter
prepares accounts in accordance with
cash system of accounting for income
tax purposes. Section 209(3) of the
Companies Act, 1956 does not over-
ride s. 145 of the Income-tax Act.
There was also no valid basis for the
AOs action in rejecting the books of
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account and system of accounting fol-
lowed by the assessee. Further, since
the department has accepted the as-
sessees system for the past several
years, the principles of consistency ap-
ply and there should be finality and cer-
tainty in litigation in the absence of
fresh facts to show that the assessees
system of accounting is arbitrary or per-
verse (Amarpali Mercantile 45 ITD 386
(Del) distinguished, Chennai Finance
81 ITD 7 (Hyd) followed).
Dalmia Pvt. Ltd. Vs. CIT & Anr. [Writ
Petition (Civil) No. 6205 of 2010,
Delhi High Court, dtd 26.09.2011]
S. 147: Despite specific & pointed
queries in s. 143(3) assessment, AO
cannot be said to have formed any
opinion if explicit opinion not re-
corded
In the balance sheet enclosed with the
ROI, the assessee disclosed sundry
creditors of Rs. 1.66 crores. In the
course of the s. 143 (3) assessment,the AO asked the assessee to submit
the entire list of sundry creditors with
their names and addresses etc. The
assessee submitted confirmations to
the extent of Rs. 1.13 crores and
though it could not explain Rs. 33
lakhs, the AO assessed only Rs. 19.86
lakhs u/s 41(1) in respect of 7 creditors.
The assessee filed an appeal on the
issue. After the expiry of 4 years andpursuant to an audit objection, the AO
issued a notice u/s 148 seeking to as-
sess the balance of the creditors as
well u/s 41(1). The assessee filed a
Writ Petition challenging the reopening
on the ground that (i) as the AO had
consciously assessed only Rs. 19.86
lakhs though he was aware of the
creditors figure being Rs. 1.66 crores,
it was a case of change of opinionand (ii) as 4 years from the end of the
assessment year had elapsed, reopen-
ing was not permissible as there was
no failure on the part of the assessee to
make a full and true disclosure of the
material facts. Delhi High Court dis-
missing the petition held that:-
1. The argument that as the AO had
called for the details of Rs. 1.66crores and confined the addition only
to Rs. 19.66 lakhs, the reopening is
on a change of opinion is not ac-
ceptable. The question of change of
opinion arises when the AO forms
an opinion and decides not to make
an addition and holds that the as-
sessee is correct. Here, though the
AO had asked specific and pointed
queries with regard to the sundrycreditors of Rs. 1.66 crores, he had
made an addition of only Rs.19.86
lakhs and there was no discussion,
ground or reason why addition of Rs.
32.97 lakhs was not made in-spite of
the assessees failure to furnish con-
formation and details to that extent.
The argument that when the assess-
ment order does not record any ex-
plicit opinion on the aspects nowsought to be examined, it must be
presumed that those aspects were
present to the mind of the AO and
had been held in favour of the as-
sessee is too far-fetched a proposi-
tion to merit acceptance
(Consolidated Photo vs. ACIT 281
ITR 394 (Del) followed);
2. The argument that there was a full
and true disclosure of material facts
is not acceptable because though in
the regular assessment proceed-
ings, the assessee was asked to
furnish details with regard to all
creditors, this was not done. The
term failure on the part of the as-
sessee is not restricted only to the
income-tax return but extends also
to the assessment proceedings. If
the assessee does not disclose or
furnish to the AO complete and cor-
rect information and details it is re-
quired and under an obligation to
disclose, there is a failure on its part
(Honda Siel Power Products vs.
DCIT followed).
DCIT Vs. Rupen Das [ITA No. 1260/
Kol/2010, ITAT Kolkata bench,
12.11.2010]
For loan taken in violation of section
269SS penalty can not be imposed if
same was taken to meet business
needs
ITAT Kolkata Bench noted that the As-
sessing Officer imposed penalty of Rs.
7,00,000 on the assessee under sec-
tion 271D of the Act on the ground that
the assessee had contravened the pro-
visions of section 269SS of the Income-
tax Act by accepting cash loans ex-
ceeding Rs. 20,000. The assessee ex-
plained that these cash loans weretaken to make the payment to the em-
ployees to avoid agitation of the em-
ployees and to maintain good relations
with the employees. The assessee took
the said cash loan due to shortage of
funds and to meet the emergency
needs under bona fide belief that those
transactions would not attract any penal
provision. The Assessing Officer has
not disputed the fact that the loanswere taken for payment of salary/
wages to the employees working as
security personnel for the assessee.
ITAT further held that they also find
force in the submissions of the as-
sessee that there was business exi-
gency forcing the assessee to take
cash loans for the purpose of disburs-
ing salary/wages to the employees of
the assessee. The Assessing Officerdid not dispute the fact that the loans
were taken for payment of salary to the
employees. Hence no penalty should
be levied.
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SNKDIRECT TAXES
Judicial pronouncements
CIT Vs. Splender Construction [ ITA
No.1977 of 2010, Delhi High Court,
dtd 14.01.2011]
Despite disclosure of conversion of
stock into investment and accep-
tance by AO, claim that gains is
LTCG attracts s. 271(1)(c) penalty
The assessee owned a plot of land
which in the earlier years was treated
as stock-in-trade. In the year of sale,
the assessee converted the stock into
investment and offered the gains as
LTCG. The AO accepted the conversion
of stock into investment but held that
the gain was a STCG as the period of
holding had to be reckoned from the
date of conversion. This was upheld by
all the authorities including the High
Court. The AO levied penalty u/s 271(1)
(c) which was deleted by the Tribunal
on the ground that as the High Court
had admitted the assessees appeal on
the merits, it showed that the issuewhether the gain was LTCG or STCG
was debatable and could not be treated
as frivolous or mala fide to attract the
levy of penalty u/s 271 (1) (c). On ap-
peal by the department, Delhi High
Court reversing the Tribunal order held
that the Tribunal has side tracked the
main issue. It was obvious that conver-
sion of the land into investment just be-
fore the sale of the property was madeto avoid payment of full taxes. Though
the AO accepted the conversion, the
assessees claim that the gains was a
LTCG amounted to furnishing inaccu-
rate particulars of income. The issue
was not debatable as held by the Tribu-
nal. Though the appeal was admitted by
the High Court, the Tribunal glossed
over a very important and fundamental
fact that the appeal was admitted anddismissed on the same date. Accord-
ingly, when the order of the AO in quan-
tum proceedings was sustained by all
successive authorities and the High
Court also dismissed the appeal at the
admission stage, albeit after admitting
the same, it cannot be said that the is-
sue was debatable.
CIT Vs. SAS Pharmaceuticals [ (2011)
60 DTR (Del) 258, Delhi High Court,
dtd. 08.04.2011]
There is no concealment or non dis-
closure in the case of surrender of
income during survey as the as-
sessee had made a complete disclo-
sure in the IT Return and offered the
surrendered amount for the pur-
poses of tax and therefore no penalty
under Sec. 271(1)(c) could be levied.
Unless it is found that there is actually a
concealment or non disclosure of the
particulars of income, penalty cannot be
impose. There is no such concealment
or non disclosure as the assessee had
made a complete disclosure in the IT
return and offered the surrendered
amount for the purpose of tax.
Insilco Limited Vs CIT [ITA No. 179 of
2009, Delhi High Court, dtd.
11.07.2011]
Tribunal can issue direction beyond
the scope of the appeal for correc-
tion of error
The Delhi High Court held that Tribunal
had rightly given the issue directions
beyond the scope of appeal, which are
nothing but pointing out what the AO
was required to do under the law. This
issue was very much before the Tribu-
nal and the Tribunal has given these
directions to give complete effect to the
orders passed in quantum proceedings.
It is trite law that nobody can be allowed
to enrich itself unjustly and in the matter
of calculation once an error is found that
can always be directed to be corrected.
The Delhi High Court did not agree with
the submission of the learned counsel
for the appellant that the Tribunal has
exceeded its jurisdiction.
Deputy Commissioner of Income Tax
Vs. Summit Securities Ltd. [(2011) 59
DTR (Mum.)(SB)(Trib.) 313, ITAT
Mumbai Special Bench, dtd.
10.08.2011]
Once a case has been decided by an
earlier Bench of the Tribunal, the
subsequent bench should respect
such decision and should not make
departure therefrom; however if after
due application of mind the subse-
quent Bench comes to the conclu-
sion that it cannot agree with the ear-
lier view, it is empowered rather
duty-bound to make reference to the
President on the point they perceive
to be an error of law in the earlier
decision.
CIT Vs. Surya Herbal Ltd. [CC
13694/2011, Supreme Court of India,
dtd. 29.08.2011]
CBDTs low tax effect circular not
applicable to matters having
cascading effect
The High Court, relying on CBDTs In-
struction No. 3/2011 dated 9-2-2011,
dismissed the departments appeal as
not maintainable on the ground that the
tax effect was less than Rs. 10 lakhs.
The department filed a SLP in the Su-
preme Court. Supreme Court allowingthe Petition held that liberty is given to
the Department to move the High Court
pointing out that the Circular dated 9th
February, 2011, should not be applied
ipso facto, particularly, when the matter
has a cascading effect. There are cases
under the Income Tax Act, 1961, in
which a common principle may be in-
volved in subsequent group of matters
or large number of matters. In such
cases if attention of the High Court is
drawn, the High Court will not apply the
Circular ipso facto.
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SNKDIRECT TAXES
Judicial pronouncements (International Taxation)
M/s Tally Solutions Private Ltd. Vs.
The Deputy Commissioner of In-
come Tax [ITA No.1235/Bang/2010,
ITAT Bangalore Bench, dtd
26.09.2011]
Nothing in s.92CA requires the AO
to first form a considered opinion
before making a reference to the
TPO. Further Excess Earning
Method is an establ ished
method of in the case of soft-
ware products.
The assessee sold its Intellectual Prop-
erty Rights (IPRs) (patents, copyrights
and trade marks) to its Associate En-
terprise (AE) for a consideration of Rs.
38.50 crores. The sale price was justi-
fied on the basis that there were
inherent flaws in the IPRs and
intense development inputs were re-
quired to be done by the buyer. The
TPO adopted the Excess Earning
Method (as prescribed by the
International Valuation Standard
Council) and determined the value of
the IPR at Rs.260.63 crores which was
upheld by the DRP. In appeal before
the Tribunal, the assessee raised the
following contentions: (a) that the AO
had made a reference to the TPO with-
out forming a considered opinion on
the issues under reference; (b) the
Excess Earning Method adopted bythe TPO was not a prescribed method
under the Act or Rules; (c) as there
was no appropriate method for deter-
mination of ALP of IPR, the value de-
clared by the assessee had to be ac-
cepted as ALP; (d) on merits, the TPO
had relied on estimates and surmises
in projecting the future cash flows while
disregarding evidence in the form of
audited financial statements. ITATBangalore bench held that:-
1. There is nothing in s.92CA that
requires the AO to first form a
considered opinion before making
a reference to the TPO. It is suffi-
cient if he forms a prima facie opin-
ion that it is necessary and expedi-
ent to make such a reference. The
making of the reference is a step in
the collection of material for mak-
ing the assessment and does not
visit the assessee with civil conse-
quences. There is a safeguard of
seeking prior approval of the CIT.
Moreover, by virtue of CBDTs In-
struction No.3 of 2003 dated
20.5.2003 it is mandatory for theAO to refer cases with aggregate
value of international transactions
more than Rs.5 crores to the TPO
(Sony India 288 ITR 52 (Del) &
Ranbaxy Laboratories 299 ITR 175
(AT) (Del) followed);
2. The argument that the Excess
Earning Method adopted by the
TPO is not a prescribed method is
not acceptable. A sale of IPR is not
a routine transaction involving
regular purchase and sale. There
are no comparables available. The
Excess Earning Method is an
established method of valuation
which is upheld by the U.S Courts
in the context of software products.
The Excess Earning Method
method supplements the CUP
method and is used to arrive at the
CUP price i.e. the price at which
the assessee would have sold in
an uncontrolled condition (method
explained, Intel Asia Electronics
Inc followed);
3. On merits, the Excess Earning
Method has to be applied using
the projected sales (and not actual
sales) because when an intangible
is sold, the risk of future income
potential lies with the buyer.
DCIT Vs. M/s. BP India Services Pri-
vate Limited [ITA No.4425/
Mum/2010, ITAT Mumbai Bench, dtd
23.09.2011]
Transfer Pricing: Important princi-
ples of Comparable Uncontrolled
Transaction explained. In applying
the TNMM, the net profit margin real-
ized from a comparable uncon-
trolled transaction is to be taken
into consideration.
1. The assessee, engaged in provid-
ing support and advisory services
to BP group companies, entered
into international transactions with
its AEs pursuant to which it made
payments for business support
services. The assessee adopted
the TNMM and claimed that the
transactions were at ALP on the
basis that its profit rate compared
favourably with the comparables.
In the list of comparables were two
entities which had suffered a loss.
There were also two other compa-
nies with high profit margin. The
TPO excluded the loss making
companies from the comparables
on the ground that they were hav-
ing a different functional & product
profile as compared to the as-
sessee. In appeal, the CIT (A) held
that the loss making concerns
could not be excluded.
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SNKDIRECT TAXES
Judicial pronouncements (International Taxation)
He also upheld the alternate argument
that if the loss making companies were
excluded, the high profit companies
also had to be excluded. On appeal by
the department, ITAT Mumbai Benchreversing the CIT(A)s order held that:-
1. Under Rule 10B(1)(e)(ii), the net
profit margin realised by the enter-
prise or by an unrelated enterprise
from a comparable uncontrolled
transaction or a number of such
transaction is computed having
regard to the same base; The
term uncontrolled transaction is
defined in Rule 10A(a) to mean a
transaction between enterprises
other than associate enterprises,
whether resident or non-resident.
The result is that in applying the
TNMM, the net profit margin real-
ized from a comparable uncon-
trolled transaction is to be taken
into consideration. The conditions
require that a case should not only
be comparable but also have un-
controlled transactions. These twin
conditions need to be cumulatively
satisfied. If a case is only compa-
rable but has controlled transac-
tions or vice-versa, it falls outside
the ambit of the list of comparable
cases;
2. Further, Rules 10B (2) & (3) set
out the circumstances with refer-ence to which the comparability of
an international transaction with an
uncontrolled transaction has to be
judged. The decisive factors for
determining inclusion or exclusion
of any case in/from the list of com-
parables are the specific charac-
teristics of services provided, as-
sets employed, risks assumed, the
contractual terms and conditionsprevailing including the geographi-
cal location and size of the mar-
kets, costs of labour and capital in
the markets etc. The fact whether
the comparable has a higher or
lower profit rate has not been pre-
scribed as a determinative factor
to make a case incomparable. This
is because profit is not a factor in
itself, but a consequence of the
effect of various factors. Only if the
higher or lower profit rate resultson account of the effect of factors
given in rule 10B (2) read with sub-
rule (3), that such case shall merit
omission. If however such extreme
profit rate is achieved because of
factors other than those given in
the rule, then such case would
continue to find its place in the list
of comparables;
3. On facts, the two loss making
companies, though excluded by
the TPO for being functionally dif-
ferent, were not eligible to be
taken as comparables because the
whole/ majority of the transactions
were from related/ controlled par-
ties. The transactions were not
uncontrolled transactions and so
the prescription of Rule 10B (1)(e)
(ii) r.w. Rule 10A(a) failed. The
alternate argument that if the loss
making companies are excluded,
the high profit companies should
also be excluded is not accept-
able. As stated above, the ques-
tion of inclusion or exclusion from
the list of comparables under Rule
10B (2) & (3) has to be determined
on the basis of factors like charac-
teristics of services provided, as-
sets employed, risks assumed,
contractual terms and conditions
prevailing including the geographi-
cal location etc and not only on the
basis of high or low profit rate
(Quark Systems 132 TTJ (Chd)
(SB) 1 explained).
CIT Vs. Oracle India (P) Ltd. [(2011)
243 CTR (Del) 103, Delhi High Court,
dtd. 30.03.2011]
Payment of royalty by assessee
company to its US based holding
company is not it by the provisions
of Sec. 92 in the absence of any
comparable case on record to deter-
mine the ordinary profit in similar
business and the price fixed has
been accepted as ALP by the TPO ;
payment of royalty being a business
expenditure which was incurred
wholly and exclusively for the pur-
pose of business of the assessee, it
is to be allowed in toto as business
expenditure.
Assessee, a 100 per cent subsidiary of
US Company, imports master copies
of software from the latter which are
duplicated on blank discs, packed and
sold in the market by way of a sub-
licence. In addition to a lumpsum
amount, assessee pays royalty @ 30
per cent of the list price of the licensed
products. AO diallowed payment of
royalty beyond 30 per cent of the sub-
licencing fee earned by the assessee
by invoking provision of Sec. 92 on the
ground that the software was sold at a
price lesser than the Indian published
price (IPP). The Delhi High Court held
that the act of AO was not justified as
for the purpose of assumption of juris-
diction under Sec, 92 it is necessary to
established that the course of business
between the resident and non resident
is so arranged that the business trans-
acted between them provides to the
resident either (i) no profits, or (ii) less
than ordinary profits which might be
expected to arise in the business.
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SNKDIRECT TAXES
Judicial pronouncements (International Taxation)
Since the assessee has declared in-
come, it is not a case of no profit. As
regards the adequacy of profits vis--
vis ordinary profits which might be ex-
pected to arise in the business, this
can be found only when exercise is
undertaken to compare the income of
the assessee with other comparable
enterprise in India. AO did not under-
take this exercise and bring on record
any comparable case to find out the
ordinary profit in this type of business.
Further the price fixed has been ac-
cepted as ALP by the TPO. Once it is
held that the payment of royalty by the
assessee to its parent company is not
hit by the provision of Sec. 92 and the
price fixed is ALP as determined by the
TPO himself, there is no reason to hold
that the expenses could not be allowed
under Sec. 37(1).
What is to be seen is that the expendi-
ture was incurred by the assessee in
the course of business and has nexus
with the business of the assessee.Once these conditions are satisfied,
the payment is to be allowed in toto as
business expenditure. Question of
commercial expediency is to be judged
by the assessee and not by AO.
Emersons Process Management
India Pvt Ltd. Vs. Add. CIT (ITA No.
8118/Mum/2010, ITAT Mumbai
Bench, dtd. 12.08.2011]
Selection of a comparable company
should be determined having regard
to its functional comparability for
the year under review and not with
reference to preceding years
The fact that the company was se-
lected as one of the comparables, by
assessee himself, in the preceding
assessment year cannot be put
against the assessee, as whether or
not a comparable is to be included
must depend on its merits rather than
be solely guided by events of an earlier
year particularly when assessee is
successfully able to demonstrate that
the entity sought to be used as compa-
rable is not engaged in same or mate-
rially similar business at least in the
present year.
Indian Additives Limited v. The ACIT
[ITA No. 951/Mds./2009, ITAT Chen-
nai, dtd. 17.06.2011]
TPO should provide reasons for re-
jecting the Most Appropriate
Method [MAM] used by the as-
sessee before adopting a different
MAM
ITAT Chennai Bench held that particu-
lar MAM used by the taxpayer cannot
be rejected without providing any co-
gent reasons. Further, the Tribunal
also mentioned that if there exist sig-
nificant amount of purchases from As-
sociates enterprises, the same cannot
be included while computing the gross
margins under the Resale Price
Method [RPM]. The Tribunal have also
re-emphasized the importance of com-
paring the Functional, Risk and Asset
Analysis [FAR] analysis of the tested
party and that of the comparable com-
panies while applying the TNM
method.
In Re. Millennium IT Software Ltd.
[A.A.R. No.835 of 2009, AAR, dtd.
29.09.2011]
License fee for Software, even if
copyrighted article, taxable as
royalty
The applicant was the developer of
software. It granted a non-exclusive
and non-transferable license to an In-
dian company to use the software with-
out any sub-licensing rights. The licen-
see was not allowed to modify the soft-
ware programme and could make cop-ies only for its own use. The applicant
filed an application for advance ruling
in which it claimed, relying on Dassault
Systems 322 ITR 125 (AAR) and Tata
Consultancy Services 271 ITR 401
(SC), that the transaction involved the
use/ right to use of a copyrighted arti-
cle but not the copyright itself and so
the license fees were not assessable
to tax as royalty u/s 9(1)(vi) of the Act
& Article 12 of the India-Sri Lanka
DTAA. The Authority of Advance Rul-
ing (IT) rejecting the applicants plea
held that Sec. 9(1)(vi) & Article 12 de-
fine the term royalty to include any
payment for the use of, or the right to
use, a copyright of scientific work.
Software programmes are a
copyright and are protected under the
Copyright Act, 1957. As the software
programme is a copyright, any pay-
ment received for transferring the right
to use it is royalty as defined in the
Act. The argument that there is a dis-
tinction between a copyright and a
copyrighted article is not acceptable
because there is no such distinction
made either in the Income-tax Act or
the Copyright Act. The use of software
involves the use of the copyright; the
software cannot be divorced from the
copyright itself. Accordingly, even a fee
for the use of a copyrighted article is
assessable as royalty. (Microsoft/
Gracemac 42 SOT 550 (Del) followed;
Dassault Systems 322 ITR 125 (AAR)
not followed; Tata Consultancy 271
ITR 401 (SC) distinguished) Dresser
Rand India Pvt. Ltd. v. ACIT [ITA No.
8753/Mum./2010, ITAT Mumbai
Bench, 07.09.2011]
Integral tests for a Cost Contribu-
tion Arrangement to be considered
at arms lengthdefined
The integral tests for a Cost Contribu-
tion Arrangement to be considered at
arms length are: that the services
were availed, the costs have been allo-
cated in a reasonable and an impartial
manner and there is documentation to
demonstrate the receipt of services.
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SNKDIRECT TAXES
Judicial pronouncements (International Taxation) / Circulars / Notifications
It is the prerogative of the assessee to
decide how he conducts the business
and not for the tax authorities to ques-
tion such commercial decisions. Exclu-
sive method of accounting does not
impact the profit and loss account
thereby the adjustment under section
145A on account of unutilized CENVAT
credit to the closing stock is unwar-
ranted.
Circulars / Notifications / Instruc-
tions / Press Release
Notification No. 47/2011 dtd.
01.09.2011
In exercise of power conferred by Sec.
90 of the Income tax Act, the CentralGovernment through the above notifica-
tion notified that all the provisions of the
Second Protocol amending the agree-
ment between the Government of India
and the Government of Singapore for
the avoidance of double taxation and
the prevention of fiscal evasion with
respect to taxes on income, shall be
given effect to in the Union of India for
taxable periods falling after January 1,2008, that is Financial Year 2008-09
and subsequent financial years in ac-
cordance with the provision of Article 3
of the Protocol.
Notification No. 48/ 2011, dtd.
02.09.2011
In exercise of the powers conferred by
sub Section (1) of Sec. 90A of the In-
come Tax Act, the Central Governmenthad adopted the agreement between
India Taipei Association in Taipei and
Taipei Economics and Cultural center in
New Delhi for the avoidance of double
taxation and the prevention of fiscal
evasion with respect to taxes on income
and notifies that all the provisions of the
said agreement shall be given effect to
in the Union of India with effect from
01.04.2012.
Notification No. 50/2011 dtd.
09.09.2011
Vide the above notification, CBDT has
notified (subject to certain conditions)
bonds issued by Industrial Finance Cor-
poration of India, Life Insurance of In-
dia, Infrastructure Development Finance
Company Limited, India Infrastructure
Finance Company Ltd. and Non-
Banking Finance Company classified as
an Infrastructure Finance Company by
the Reserve Bank of India as Long term
Infrastructure bonds in reference to
Sec. 80CCF.
Notification No. 49/2011 dtd.
06.09.2011
In exercise of the powers conferred by
Sec. 10(45) of the Income Tax Act, the
Central Government has through the
above notification, notified certain allow-
ances and perquisites w.r.e.f.
01.04.2008 for serving Chairman and
members of Union Public Service Com-
mission namely, the value of rent free
official residence, conveyance facilities,
sumptuary allowance and leave travel
concession. The said notification also
notifies allowances and perquisites for
retired Chairman and retired members
of Union Public Service Commission
which are as follows:
a) A sum of max. Rs. 14,000 per
month for defraying the service of
an orderly and meeting expense
incurred towards secretarial assis-
tance on contract basis.
b) The value of a residential telephone
free of cost and the number of free
calls to the extent of Rs. 1,500 per
month (over and above free calls
allowed).
Order under Sec. 119 of IT Act [F.
No.225/72/2010/ITA.II dtd. 30.09.2011]
Central Board of Direct taxes depart-
ment has extended due date of filing
income tax return for the assessment
year 2011-12 from 30-09-2011 to 31-
10-2011 for the assessee of Sikkim.
This step is taken due to earthquake in
Sikkim last month which cause life dis-turbance as well as life losses in Sikkim
state.
Accordingly, CBDT also extends the
audit report as prescribed under section
44AB of income tax act to 31 October
2011.
Press Information Bureau
India Signs DTAA with Uruguay on
08.09.2011. Agreement will Provide
Tax Stability to the Residents of both
Countries, Facilitate Mutual Economic
Cooperation and Stimulate the Flow of
Investment, Technology and Services.
The Government of India signed a Dou-
ble Taxation Avoidance Agreement
(DTAA) with the Oriental Republic of
Uruguay for the avoidance of double
taxation and for the prevention of fiscalevasion with respect to taxes on income
and on capital on 8th September, 2011.
The DTAA provides that business prof-
its will be taxable in the source state if
the activities of an enterprise constitute
a permanent establishment in that state.
Such permanent establishment includes
a branch, factory, etc. Profits of a con-
struction, assembly or installation pro-
jects will be taxed in the state of source
if the project continues in that state for
more than six months.
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SNKDIRECT TAXES / INDIRECT TAXES
Judicial Pronouncements / Circulars / Notifications
Profits derived by an enterprise from
the operation of ships or aircraft in in-
ternational traffic shall be taxable in the
country of residence of the enterprise.
Dividends, interest and royalty income
will be taxed both in the country of resi-
dence and in the country of source.
However, the maximum rate of tax to
be charged in the country of source will
not exceed 5% in the case of dividends
and 10% in the case of interest and
royalties. Capital gains from the sale of
shares will be taxable in the country of
source and tax credit will be given in
the country of residence.
The Agreement further incorporates
provisions for effective exchange of
information including banking informa-
tion and assistance in collection of
taxes between tax authorities of the
two countries in line with internationally
accepted standards including anti-
abuse provisions to ensure that the
benefits of the Agreement are availed
of by the genuine residents of the twocountries.
The Agreement will provide tax stability
to the residents of India and Uruguay
and facilitate mutual economic coop-
eration as well as stimulate the flow of
investment, technology and services
between India and Uruguay.
F. NO. 225/93/2009/ITA.II
Guidelines for selection of Cases
for scrutiny for F.Y. 2010-11
Selection of cases for scrutiny during
the financial year 2010-11 will be done
primarily through CASS this year. Man-
ual Selection for scrutiny this year will
be limited only to a few categories of
cases listed below.
List of cases selected during each
month in accordance with the selection
criteria mentioned below shall be sub-
mitted by the Assessing Officers to
their respective Range heads by the
15th
of the following month and also
displayed on the Notice Board of their
office.
These guidelines are meant only for
the use of officers of the Income Tax
Department. These are not be dis-closed even if a request is made under
the right to Information Act, in view of
the decision of the Central Information
Commission in the case of Shri Kamal
Anand Vs Director (ITA-II), CBDT
(Order No. CIC/AT/2007/00617 dated
21.02.2008).
Selection Criteria Applicable to all re-
turns:
a) Value of international transaction as
defined u/s 92B exceeds Rs. 15
crores.
b) Cases involving addition in an ear-
lier assessment year in excess of
Rs.10 lacs on a substantial and re-
curring question of law or fact which
is confirmed in appeal or is pending
before an appellate authority.
c) Cases involving addition in an ear-
lier assessment year on the issue of
transfer pricing in excess of Rs.10
Lakhs or more.
d) Assessments in survey cases for
the financial year in which survey
was carried out This criteria will not
apply if all of the following condi-
tions are fulfilled:
1. There are no impounded books or
documents.
2. There is no retraction of disclosure
made during the survey.
3. Declared income, excluding any
disclosure made during the survey,
is nor less than the declared in-
come of the preceding assessment
year.
e) Assessment in Search & Seizure
cases to be made under sections
158B, 158BC, 158BD, 153A 153C
& 143(3) ofthe IT Act.
f) Assessments initiated under section
147 / 148 of the IT Act.
Assessing Officer may select any re-
turn of scrutiny after recording the rea-
sons and obtaining approval of theCCIT/DGIT. The cases under this
category should be selected if there
are compelling reasons and the case is
not selected through CASS. There
cases should be watched by CCIT /
CIT in respect of the quality of assess-
ment.
INDIRECT TAXES
Judicial Pronouncements
CCE Vs. M/s. Sundstrand Forms
Pvt. Ltd. [Civil Appeal No. 4077 of
2003, Supreme Court of India, dtd.
30.08.2011]
Marketability is essential criteria for
charging excise duty and product
must be marketable in the condition
in which it emerges
The Supreme Court of India in a recent
decision in case of Medley Pharma-
ceuticals Ltd. Vs. The Commissioner of
Central Excise and Customs, Daman,
reported in (2011) 2 SCC 601 has very
carefully considered almost all the pre-
vious decisions of Supreme Court on
the issue of the levy/payment of Excise
Duty Valuation on articles manufac-
tured by the assessee company.
After referring to practically all the deci-
sions on the issue, Supreme Court
held that the consistent view is that the
marketability is an essential criteria for
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SNKINDIRECT TAXES
Judicial Pronouncements
charging duty and that the test of mar-
ketability is that the product which is
made liable to duty must be market-
able in the condition in which it
emerges.
Supreme Court also held that the word
Marketable means saleable or suit-
able for sale and that it need not in
fact be marketed but then the article
should be capable of being sold to
consumers, as it is without anything
more. Supreme Court further went on
to hold that the essence of marketabil-
ity of goods is neither in the form nor
in the shape or condition in which the
manufactured article is found but it is
the commercial identity of the article
known to the market for being bought
and sold. The Court further held that
the product in question is generally not
being bought or sold or has no de-
mand in the market, would be irrele-
vant.
M/s. Asia Impex Versus CC, Amris-tar [Customs Appeal No.C/351/2007,
CESTAT Delhi, dtd. 11.01.2011]
Opinion of one expert cannot be
rejected on the basis of that of an-
other expert unless there is suffi-
cient independent reason for such
rejection
The value of the imported goods can-
not be based on the value of the
goods in the local market. In the pre-
sent case, no valid reasons have been
given by the commissioner to reject
the valuation adopted by the overseas
chartered engineer. Similarly, com-
paring the value of the imported goods
which are old and used with the data
available in DOV is also not appropri-
ate as the said data do not disclose
the age, residual life, physical condi-tion of the goods sought to be com-
pared. The decision in the case of An-
ish Kumar Spinning Mills is to the ef-
fect that the opinion of one expert
cannot be rejected on the basis of that
of another expert unless there is suffi-
cient independent reason for such re-
jection
Commissioner of c. Ex., Bangalore
Vs. Tata Advances Materials Ltd.
[2011 (271) ELT 62 (Kar.), Karnataka
High Court, 11.04.2011]
Payment inclusive of Central Excise
Duty by Insurance Company on de-
struction of Capital goods could not
render credit claimed by assessee as
irregular. Assessee had paid insur-
ance premium and got compensation.
It is not a case of double payment or
irregular availment of Cenvat credit.
Home Solutions Retails (India) Ltd.
Vs. Union of India & ors. [ WP(C)
No.3398/2010, Delhi High Court, dtd.
23.09.2011]
Delhi High Court has upheld the
constitutional validity of Service
Tax on renting of immovable prop-
erty with retrospective effect
Delhi High Court held that when prem-
ise is taken for commercial purpose, itis basically to sub serve the cause of
facilitating commerce, business and
promoting the same. Therefore, there
can be no trace of doubt that an ele-
ment of value addition is involved and
once there is a value addition, there is
an element of service.
The imposition of service tax under
Section 65(105)(zzzz) read with Sec-
tion 66 is not a tax on land and build-
ing which is under Entry 49 of List II.
What is being taxed is an activity, and
the activity denotes the letting or leas-
ing with a purpose, and the purpose is
fundamentally for commercial or busi-
ness purpose and its furtherance. The
concept has to be read in conjunction.
Once there is a value addition and theelement of service is involved, in con-
ceptual essentiality, service tax gets
attracted and the impost gets out of
the purview of Entry 49 of List II of the
Seventh Schedule of the Constitution
and falls under the residuary entry,
that is, Entry 97 of List I.
Retailers Association of India Vs.
Union of India & Ors, [(2011) 60 DTR
(Bom) 49, Bombay High court, dtd.
04.08.2011]
Bombay High Court also upheld the
constitutional validity of Service
Tax on renting of immovable prop-
erty with retrospective effect
Levy of service tax on renting of im-
movable property for commercial pur-
poses under Sec. 65(105)(zzzz) of the
Finance Act, 1994, is a charge on ser-
vice and not on lands and buildings
and,therefore, such levy of service tax
is within the legislative competence of
the Parliament referable to the residu-
ary power of the Parliament under Arti-
cle 248 r/w. entry 97 of list I of Sched-
ule VII to the Constitution; amendment
of sub. Cl. (zzzz) was given retrospec-
tive effect so as to cure the deficiency
pointed out by the Delhi High Court in
the original provision and thus, the
same does not invalidate the amended
provision.
Meghachem Industries Vs. Commis-
sioner Of C. Ex., Ahmedabad [2011
(23) STR 472 (Tri.-Ahmedabad),
CESTAT Ahmedabad bench,
04.04.2011]
Courier Service used for sending
documents is definitely activity relating
to business and hence eligible for
availing Cenvat Credit.
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SNKINDIRECT TAXES / OTHER LAWS
Judicial Pronouncements / Circulars / Notifications
Commr. of C. Ex., Bangalore III Vs.
Satnzen Toyotetsu India (P) Ltd.
[2011 (23) STR 444 (Kar.), Karnataka
High Court, 08.04.2011 ]
Definition of Input Service is inclusive
and services mentioned in Sec. are
only illustrative. Test for eligibility is
whether service is used for manufac-
ture of final product directly or indi-
rectly in relation to activities relating to
business. If any of these two tests are
satisfied, service falls within the defini-
tion of input service and manufacturer
eligible to avail Cenvat credit.
Enso Secutrack Ltd. Vs. Commis-
sioner of C. Ex., Hyderabad [2011
(23) STR 465 (Tri.-Bang.), CESTAT
Bangalore Bench, 19.04.2011]
Provision of Rule 3(3) of Taxation of
Service (Provided Outside India and
Received in India) Rules, 2006 can-
not be invoked if service rendered
and consumed outside India.
The appellant raised FCCBs in the
international capital market and the
money so raised was invested in Mau-
ritius. The service was rendered and
consumed outside India. Once it is
admitted that the money were invested
outside India, but only because the
said money raised is supposedly in
relation to the benefit or business of
the service recipient located in India,provision of Rule 3(3) cannot be in-
voked. The money so raised by issu-
ing FCCBs is invested in Mauritius
which is outside India and the services
rendered were for raising of such
money for investment in Mauritius.
Circulars / Notifications / Instruc-
tions
Notification No. 21 & 22/2011 CE(NT) dtd. 14.09.2011
Central Excise Rules, 2002 have been
amended to provide that the returns
and statements prescribed under
Rules 12 will have to be filed electroni-
cally by all the assessees irrespective
of the duty paid in the preceding years.
Monthly Return for production and re-
moval of goods (ER-1), Quarterly Re-turn (ER-3), Annual Financial Informa-
tion Statement (ER-4) are some of the
returns and statements prescribed un-
der Rule 12.Similar amendment has
been made in CENVAT Credit Rules,
2004 to the effect that assessee will
now have to file the annual Declaration
in respect of principal inputs (ER-5)
and the monthly return of information
relating to principal inputs (ER-6) elec-
tronically irrespective of the duty paid
in the preceding year.
Notification No. 44/2011-ST, dtd.
09.09.2011
Business Auxiliary Services provided
by Sub Brokers to Stock Brokers in
relation to sale or purchase of securi-
ties listed on registered stock ex-
change are exempt from payment ofservice tax vide notification No.
31/2009-ST dated 01.09.2009. Such
exemption has now been extended
vide the above notification to the au-
thorized person also.
Notification No. 45/2011-ST, dtd.
12.09.2011
Taxable service provided to any busi-
ness entity, by an arbitral tribunal, inrespect of arbitration has been ex-
empted from payment of service tax
vide the above notification.
Instruction No. F. No. 276/8/2009-
CX-8A-ST, dtd. 26.09.2011
Vide the above instruction; it has been
held that the service tax liability on any
taxable service provided by a non-
resident or a person located outsideIndia, to a recipient in India, would
arise w.e.f. 18.04.2006, i.e., the date of
enactment of section 66A of the Fi-
nance Act, 1994 and not from
01.01.2005 as instructed vide instruc-
tion no. F No. 275/7/2010-CX-8A,
dated 30-6-2010.
OTHER LAWS
Judicial Pronouncements
Gheru Lal Bal Chand Vs. State of
Haryana [Punjab & Haryana High
Court]
Innocent purchaser cannot be disal-
lowed Input Tax Credit (ITC) for non
payment of tax by seller.
In legal jurisprudence, the liability can
be fastened on a person who either
acts fraudulently or has been a party to
the collusion or connivance with the
offender. However, law nowhere envis-
ages imposing any penalty either di-
rectly or vicariously where a person is
not connected with any such event or
an act. Law cannot envisage an almost
impossible eventuality. The onus upon
the assessee gets discharged on pro-
duction of Form VAT C-4 which is re-
quired to be genuine and not thereafter
to substantiate its truthfulness by run-
ning from pillar to post to collect the
material for its authenticity. In the ab-
sence of any malafide intention, con-
nivance or wrongful association of the
assessee with the selling dealer or any
dealer earlier thereto, no liability can
be imposed on the principle of vicari-
ous liability. Law cannot put such oner-
ous responsibility on the assessee oth-
erwise; it would be difficult to hold the
law to be valid on the touchstone of
articles 14 and 19 of the Constitution of
India.
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SNKOTHER LAWS
Judicial Pronouncements /Circulars / Notifications
The selling-registered dealer who had
collected tax from the purchasing-
registered dealer acts as an agent for
the Government as held in Atul Fasten-
ers Ltd.s case. Still further, paid would
mean and embrace within it ought to
have been paid as enunciated in El-
phinstone Spinning and Weaving Mills
Co.Ltd.s case. Moreover, the apex
Court in B. R. Enterprises v. State of
U.P., (1999)9 SCC 700, Calcutta Guja-
rathi Education Society v. Calcutta Mu-
nicipal Corporation (2003) 10 SCC 533
and M.Nagraj v. Union of India (2006) 8
SCC 212 has interpreted the rule of
reading down statutory provisions to
mean that a statutory provision is gen-
erally read down so as to save the pro-
vision from being pronounced to be
unconstitutional or ultra vires. The rule
of reading down is to construe a provi-
sion harmoniously and to straighten
crudities or ironing out creases to make
a statute workable.
To conclude, no liability can be fas-
tened on the purchasing registered
dealer on account of non-payment of
tax by the selling registered dealer in
the treasury unless it is fraudulent, or
collusion or connivance with the regis-
tered selling dealer or their predecessor
with the purchasing registered dealer is
established.
M/s. L.N. Gadodia & Sons & ANR. Vs.
Regional Provident Fund Commis-
sioner [SLP No. 11230 of 2008, Su-
preme Court of India, dtd.
26.09.2011]
SC allows clubbing of two establish-
ments as one for the purposes of the
PF as there was unity of ownership,
management, control, finance, la-
bour and functional integrity
When two establishments are run by
the same family under a common man-
agement with common work force and
with financial integrity, they are ex-
pected to be treated as branches of
one establishment for the purposes of
the Provident Fund Act. The authorities
had clubbed two establishments as one
and demanded provident fund contribu-
tion from both. It argued that they were
in separate business enterprises and
registered as separate private limited
companies. However, the Delhi high
court and the Supreme Court accepted
the contention of the PF Commissioner
that they were not separate entities. It
said that the tests in such cases was
whether there was unity of ownership,
unity of management and control, unity
of finance and unity of labour and unity
of functional integrity.
Circulars / Notifications
General Circular No. 66/2011, dtd.
04.10.2011
The time for filing DIN-4 by DIN holders
for furnishing the PAN and to update
PAN details has been extended till
15.12.2011.
General Circular No. 65/2011-MCA,
dtd. 04.10.2011
Company Law Settlement Scheme,
2011 has been extended upto 15th De-
cember, 2011.
Due Dates of key compliances pertaining to the month of October 2011:
5th
Oct. Payment of Service Tax & Excise duty for September6th Oct. Payment of Service Tax & Excise duty paid electronically through internet banking7th Oct. TDS/TCS Payment for September10
th
Oct. Excise Return ER1 / ER2 /ER615
thOct. PF Contribution for September
21st
Oct. ESIC Payment for September25th Oct. Service tax Return for the half year ended on 30-09-2011
15th Oct. Due date of for filing TDS return for the quarter ended on 30-09-2011
The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individualor entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented herein,before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. Thisnewsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.